Do you want the big thing or the new thing?
More importantly: Do you want to invest in the big thing or the new thing?
It's a question that haunts any industry vulnerable to disruption, which is pretty much all of them these days.
Take the automotive business. Bloomberg New Energy Finance just released its latest long-term outlook for electric vehicles. It posits, startlingly, that sales of all-electric and plug-in hybrid vehicles will overtake those using internal combustion engines within roughly two decades:
The late 2030s may sound like a long way away. But they aren't when put in the context of an automotive industry that's only been around for a century or so.
And they really aren't if you draw the same chart but in a slightly different way.
Instead of showing the absolute sales of each technology, this version shows the growth in sales of each type every year:
Based on BNEF's projections, global sales of vehicles will rise by 1.67 million in the year 2026. But sales of electric vehicles are forecast to rise by 2.06 million, while the number of vehicles using internal combustion engines will fall slightly, by around 400,000. To be clear, absolute sales of electric vehicles in that year are expected to be just over 10 million, versus almost 87 million for their traditional counterparts.
So if you're an executive running an automotive company, what do you do with these data?
One answer is to just conclude they're misguided and ignore them. BNEF's forecast could, of course, be way off. The likes of BP PLC and the International Energy Agency, for example, forecast much slower adoption. Equally, though, others such as Continental AG, the German tire and components manufacturer, expect electrification to take hold much faster.
And therein lies the problem for our autos executive just trying to get a decent night's sleep.
Because while size matters, growth often matters more when it comes to investment.
As Kingsmill Bond, an analyst at emerging-markets research firm Trusted Sources, put it in a recent speech in Dublin about the transition in energy consumption:
The supposed lesson of history is that changes in energy systems take place slowly. Systemic change is indeed slow, but marginal change can be extremely rapid. And it is marginal change that matters for companies and financial markets.
Bond pointed to the example of multiple coal-miner bankruptcies in the past couple of years despite global demand dropping only slightly from 2014's peak. This week, Consol Energy Inc. filed to spin off its coal-mining business from its natural-gas operations. Coal still represented 60 percent of Consol's revenue last year -- but the company saw the writing on the wall a while ago.
Similarly, fracking by U.S. exploration and production companies accounts for less than 10 percent of global oil production, and these companies tend to overspend on growth. Yet they have little trouble plugging the gap with fresh financing in the bond and equity markets.
Big Oil, meanwhile, spends its time reassuring investors it is limiting spending to protect dividends -- that is, returning capital. And while the majors are defined by their mega-projects, 13 percent of their investment this year is going to shale and tight oil resources, more than double last year's proportion and up from just 1 percent a decade ago, according to a report published this week by the IEA. Big Oil is trying to follow.
Now think about those autos projections for 2026. Your company might be big in the 87 million-strong traditional-vehicle market, and that's great. But if that market is shrinking, don't be surprised if investors' eyes wander toward the smaller, but shinier, new car on the block. Expect your valuation to realign accordingly.
That is why Tesla Inc., having fallen 14 percent in the past few weeks, is still valued at $54 billion, more than GM, despite the Californian electric-vehicle maker's panoply of red flags and its sales being a rounding error of Detroit's behemoth.
It also helps explain why Ford Motor Co. is investing in a hybrid version of its already highly popular F-150 truck and also, in part, why it just replaced ex-CEO Mark Fields with the man who was leading its efforts in another disruptive area, self-driving cars. The same rationale can be applied to why Chinese-owned Volvo is committing to an electric drive-train in every new launch from 2019, as well as the fact that there are 38 (and counting) plug-in hybrid and battery vehicles currently slated for release in the U.S. by the world's major automakers, according to BNEF.
Kodak's ultimately doomed focus on its leading position in film and, conversely, International Business Machines Corp.'s prescient exit from the commodifying PC business are business-school cliches. But they're cliches for a reason. Companies disregard marginal change and retreat to the comfort of their historic strongholds potentially at their peril.
And while it is tough for incumbents to pivot to a new business, it is not impossible. As my colleague Shira Ovide wrote here, it was critical for Facebook Inc. that, even as it was launching its IPO in 2012, it was also overhauling its business to focus on smartphones rather than its desktop PC product -- despite the latter accounting for 89 percent of the company's advertising revenue that year:
Electric vehicles today are often expensive, range-bound and lacking good chargers. Equally, though, they have advantages in terms of pollution, maintenance and acceleration. If they continue to improve faster than traditional vehicles can, then every autos executive should bear in mind that successful technologies tend to hit a tipping point and accelerate into an S-curve (see this), shoving aside the old guard.
And that's the last, but crucial, factor: expectation.
In that crazy feedback loop called finance, faith in future success sucks in the dollars, which can then make success happen. That's true even if people lose a lot of dollars along the way (see 19th Century railroads and, a bit more recently, the Internet).
Belief in the new thing can go a long way toward making it the big thing.
To contact the editor responsible for this story:
Mark Gongloff at firstname.lastname@example.org